Gillette Co. v. Franchise Tax Board

Filed 12/31/15

IN THE SUPREME COURT OF CALIFORNIA

THE GILLETTE COMPANY et al., )
)
Plaintiffs and Appellants, )
) S206587
v. )
) Ct.App. 1/4 A130803
FRANCHISE TAX BOARD, )
) San Francisco County
Defendant and Respondent. ) Super. Ct. No. CGC-10-495911
[And five other cases.*] )
)
)
____________________________________)

Here we consider how California calculates income taxes on multistate
businesses. In 1974, California joined the Multistate Tax Compact (Multistate
Tax Com., Model Multistate Tax Compact (Aug. 4, 1967)) (Compact), which
contained an apportionment formula and permitted a taxpayer election between the
Compact‟s formula and any other formula provided by state law. (Former Rev. &
Tax. Code, § 38001 et seq., enacted by Stats. 1974, ch. 93, § 3, p. 193 and
repealed by Stats. 2012, ch. 37, § 3.) The Legislature later amended the Revenue

* The Proctor & Gamble Manufacturing Co. v. Franchise Tax Bd. (No.
CGC-10-495912); Kimberly-Clark Worldwide, Inc. v. Franchise Tax Bd. (No.
CGC-10-495916); Sigma-Aldrich, Inc. v. Franchise Tax Bd. (No. CGC-10-
496437); RB Holdings (USA) Inc. v. Franchise Tax Bd. (No. CGC-10-496438);
Jones Apparel Group, Inc. v. Franchise Tax Bd. (No. CGC-10-499083).

1
and Taxation Code to specify a different apportionment formula that “shall” apply
“[n]otwithstanding” the Compact‟s provisions. (Rev. & Tax. Code,1 § 25128,
subd. (a) (section 25128(a)).) Taxpayers here contend they remain entitled to elect
between the new statutory formula and that contained in the Compact. We
conclude the Legislature may properly preclude a taxpayer from relying on the
Compact‟s election provision.
I. BACKGROUND

A. Apportionment of Business Income in California Before the
Compact
When a business earns income in multiple jurisdictions, apportionment is
necessary to avoid tax duplication or other inequity. The Uniform Law
Commission, also known as the National Conference of Commissioners on
Uniform State Laws, is “a non-profit association of lawyers who draft model
legislation regarding areas of law in which they believe it would be best to have
uniformity of law among the states.” (Metso Minerals Industries v. FLSmidth-
Excel LLC (E.D. Wis. 2010) 733 F.Supp.2d 969, 973, fn. 5.) In 1957, this
commission drafted the Uniform Division of Income for Tax Purposes Act (7A pt.
1 West‟s U. Laws Ann. (2002) U. Div. of Income for Tax Purposes Act, § 1 et
seq., p. 141) (the UDITPA or the Act). The Act was intended to provide a uniform
guide for state laws and practices regarding multistate business taxation and to
prevent taxation in multiple jurisdictions based “on more than [a business‟s] net
income.” (7A pt. 1 West‟s U. Laws Ann., supra, prefatory note, p. 142; see
ASARCO Inc. v. Idaho State Tax Comm’n (1982) 458 U.S. 307, 310, fn. 3.) Our
Legislature codified the provisions of the UDITPA in 1966. (See § 25120 et seq.)

1 Subsequent statutory references are to the Revenue and Taxation Code
unless noted.

2
The statutory scheme included an apportionment formula based on three factors:
(1) The value of real property the business held in California (the property factor);
(2) compensation paid to California employees (the payroll factor); and (3) gross
California sales (the sales factor). Each factor was divided by the worldwide
property holdings, payroll, and sales of the business. (§§ 25129, 25132, 25134.)
Those three factors were added, then divided by three, yielding a California
apportionment figure. (Former § 25128, as added by Stats. 1966, ch. 2, § 7,
p. 179.) Under this approach, each constituent factor was given equal weight in
calculating the ultimate apportionment figure. That figure was then multiplied by
the business‟s worldwide income to determine its California income tax liability.2
(§ 25101.)

B. Promulgation of the Compact and its Adoption in California
The UDITPA was not widely adopted. States had scant motive to enact a
uniform apportionment scheme benefitting multistate corporations. (See Ryan,
Beyond BATSA: Getting Serious About State Corporate Tax Reform (2010) 67
Wash. & Lee L.Rev. 275, 314, fn. 216 (Ryan); Swain, Reforming the State
Corporate Income Tax: A Market State Approach to the Sourcing of Service
Receipts (2008) 83 Tul. L.Rev. 285, 295; see also 61C West‟s Ann. Rev. & Tax.
Code (2004 ed.) p. 456 [UDITPA adoption table].) The incentive arose with the
specter of federal intervention. The United States Supreme Court held in

2 For example, if a taxpayer had 40 percent of its property in California, paid
30 percent of its payroll to California employees, generated 20 percent of its gross
receipts from California sales, and had $10 million of worldwide business income,
the taxpayer would: (1) Calculate its apportionment factor by adding the property
factor (40%), the payroll factor (30%), and the sales factor (20%), and dividing by
three (90% divided by three equals 30%); then (2) calculate its taxable income by
multiplying the apportionment factor (30%) by its total business income ($10
million) to arrive at a total taxable California income of $3 million.

3
Northwestern States Portland Cement Co. v. Minnesota (1959) 358 U.S. 450, that
a state income tax could be levied on an out-of-state corporation based upon its in-
state activities. “[T]he entire net income of a corporation, generated by interstate
as well as intrastate activities, may be fairly apportioned among the States for tax
purposes by formulas utilizing in-state aspects of interstate affairs.” (Id. at p.
460.) This decision “prompted Congress to enact a statute . . . which sets forth
certain minimum standards for the exercise of that power.”3 (U.S. Steel Corp. v.
Multistate Tax Comm’n (1978) 434 U.S. 452, 455, fn. omitted (U.S. Steel).)
Congress also authorized a study to recommend legislation regulating state
taxation of interstate business income. (Ibid.)
That study, known as the “Willis Report,” “recommended a uniform two-
factor apportionment formula based on the amount of property and payroll in each
state, as well as a blanket nexus standard that limited income tax jurisdiction to
states in which a business had either real property or payroll.” (Ryan, supra, 67
Wash. & Lee L.Rev. at pp. 311-312, fns. omitted; see Judiciary Special Subcom.
on State Taxation of Interstate Commerce, H.R.Rep. No. 89-952, 1st Sess., pp.
1135-1136 (1965).) Starting in 1965, several congressional bills proposed a
comprehensive tax scheme for interstate business income. (U.S. Steel, supra, 434
U.S. at p. 456, fn. 4.) Most states objected to the loss of sovereignty inherent in
the Willis Report recommendations. Some states also feared the proposals would
cause lost revenue. (See McLure, Jr., The Difficulty of Getting Serious About
State Corporate Tax Reform (2010) 67 Wash. & Lee L.Rev. 327, 337.)

3 The statute prohibits states from imposing an income tax where the only
activity in the state is the solicitation of sales fulfilled outside the state. (See 15
U.S.C. § 381(a).)

4
 The Willis Report and subsequent congressional action spurred an
“unprecedented special meeting of the National Association of Tax
Administrators” in January 1966, at which “the idea of a multistate tax compact
was envisioned.” (Multistate Tax Com., First Annual Rep., Period Ending Dec.
31, 1968, p. 1.) A draft of the Compact was presented to the states in January
1967. It provided an alternative to potential federal legislation restricting state
taxation power. Nine states adopted it within six months. (Id. at p. 2.)
The Compact includes two central features. The first is the creation of the
Multistate Tax Commission (Commission). The Commission is empowered to:
(1) study state and local tax systems; (2) recommend proposals to increase
uniformity or compatibility of state and local tax laws, thus improving tax law and
administration; (3) compile and publish information to assist the implementation
of the Compact; and (4) do anything “necessary and incidental to the
administration of its functions pursuant to this compact.” (Compact, art. VI, § 3.)
While the Commission may adopt uniform regulations interpreting the tax laws of
its member states, these regulations are not binding. (Compact, art. VII; U.S.
Steel, supra, 434 U.S. at p. 457.) The Compact also empowers a member state to
ask the Commission to conduct audits, but only if the state has enacted enabling
legislation. (Compact, art. VIII.)
The second central feature is the adoption of the UDITPA‟s equal-weighted
apportionment formula. (Compact, art. IV.) The formula is designed to address
the lack of uniformity among the various states‟ apportionment schemes. (Com.,
Third Annual Rep. (Fiscal Year July 1, 1969-June 30, 1970) p. 2.) The Compact
contains an election provision. A taxpayer subject to apportionment of income “in
two or more party States may elect to apportion and allocate his income in the
manner provided by the laws of such State . . . .” (Compact, art. III, § 1.)

5
Alternatively, the taxpayer may elect to rely on the Compact‟s apportionment
formula. (Ibid.)
In 1974, the Legislature passed former section 38006, which included the
entire text of the Compact, and made California a member state. (Stats. 1974, ch.
93, § 3, p. 193.) This action resulted in no immediate apportionment change
because, as noted, existing California law had previously adopted the UDITPA
formula.4

C. Change in the Apportionment Formula: Amendment of Section
25128
This situation changed in 1993 when the Legislature adopted a different
apportionment formula. It amended section 25128(a) to provide:
“Notwithstanding Section 38006 [i.e., the provisions of the Compact], all business
income shall be apportioned to this state by multiplying the business income by a
fraction, the numerator of which is the property factor plus the payroll factor plus
twice the sales factor, and the denominator of which is four . . . .”5 (§ 25128(a), as
amended by Stats. 1993, ch. 946, § 1, p. 5441, italics added.) Under this new
formula, in-state sales were double-counted. Those sales, then, amounted to half
the calculation rather than the one-third used under the UDITPA approach. The
1993 legislation did not withdraw California as a member state or otherwise

4 In 2015, the Commission passed a resolution modifying article IV of the
model Compact to delete the UDITPA formula and to allow the adopting member
state to replace it with any state apportionment formula. (See Model Compact, art.
IV, § 9, as revised by the Multistate Tax Com. on July 29, 2015, available online
at [as of Dec. 31, 2015].)
5 Section 25128 has subsequently been amended in ways not pertinent here.
(See Stats. 1994, ch. 861, § 15, pp. 4269-4271; Stats. 1996, ch. 952, § 52, pp.
5447-5449; Stats. 1997, ch. 605, § 108, pp. 4025-4027.)

6
modify the Compact‟s election provision or apportionment formula set out in
former article III, section 38006. (Compact, art. III, § 1, art. IV.)

D. The Current Litigation
Between 1993 and 2005, six multistate corporations (Taxpayers) paid
income tax calculated under the new formula. They then sought a refund, arguing
that the Compact gave them the right to choose between the new legislative
formula or the UDITPA approach. They claimed that under the UDITPA formula,
they had overpaid their income tax by approximately $34 million. After the
Franchise Tax Board (FTB) denied their claims, they filed a refund action. The
trial court sustained the FTB‟s demurrer, concluding the Legislature could,
consistent with the Compact, eliminate the election provision. The Court of
Appeal reversed, reasoning in part that the Legislature could not unilaterally
repudiate mandatory terms of the Compact, which permitted election.6 We
granted the FTB‟s petition for review.
II. DISCUSSION
The FTB contends section 25128(a)‟s new apportionment formula should
control, arguing that when member states entered the Compact their intent “was to
allow them to change their state laws to establish alternate mandatory
apportionment formulas.” Taxpayers do not dispute that the Legislature has
authority to enact an alternate formula. They argue instead that the Compact

6 In the wake of the Court of Appeal‟s decision, the Legislature passed a bill
repealing the Compact. (Stats. 2012, ch. 37, § 3.) An uncodified portion of the
bill also provided that “an election affecting the computation of tax must be made
on an original timely filed return for the taxable period for which the election is to
apply and once made is binding,” and this doctrine is declaratory of existing law.
(Stats. 2012, ch. 37, § 4, subds. (a), (c).) This case does not involve application of
that subsequent legislative action.

7
explicitly permits election and the Legislature is bound to allow it. This case turns
on whether the Legislature is so bound. We conclude it is not and California‟s
statutory formula governs.

A. The Compact Constitutes State Law
Taxpayers recognize that the Compact does not have the force of federal
law. It was never ratified by Congress as required under the compact clause. (See
U.S. Const., art. I, § 10, cl. 3.) Even so, the United States Supreme Court held in
U.S. Steel that states could enter into an agreement with each other without such
ratification so long as the agreement was not “ „directed to the formation of any
combination tending to the increase of political power in the States, which may
encroach upon or interfere with the just supremacy of the United States.‟ ” (U.S.
Steel, supra, 434 U.S. at p. 468, quoting Virginia v. Tennessee (1893) 148 U.S.
503, 519.) U.S. Steel concluded the Compact did not run afoul of the compact
clause: “[T]he test is whether the Compact enhances state power quoad the
National Government. This pact does not purport to authorize the member States
to exercise any powers they could not exercise in its absence. Nor is there any
delegation of sovereign power to the Commission; each State retains complete
freedom to adopt or reject the rules and regulations of the Commission.
Moreover, as noted above, each State is free to withdraw at any time.” (U.S. Steel,
at p. 473.)
The Legislature ordinarily has authority to repeal or modify any enactment.
“[T]he legislative power the state Constitution vests is plenary,” and “[a] corollary
of the legislative power to make new laws is the power to abrogate existing ones.
What the Legislature has enacted, it may repeal.” (California Redevelopment
Assn. v. Matosantos (2011) 53 Cal.4th 231, 254, 255; see Cal. Const., art. IV, § 1.)
“We thus start from the premise that the Legislature possesses the full extent of the

8
legislative power and its enactments are authorized exercises of that power. Only
where the state Constitution withdraws legislative power will we conclude an
enactment is invalid for want of authority.” (Matosantos, at p. 254.) Similarly,
“the Legislature is supreme in the field of taxation, and the provisions on taxation
in the state Constitution are a limitation on the power of the Legislature rather than
a grant to it.” (Delaney v. Lowery (1944) 25 Cal.2d 561, 568; see Santa Clara
County Local Transportation Authority v. Guardino (1995) 11 Cal.4th 220, 247.)
Taxpayers acknowledge the lack of congressional approval but argue
“interstate compacts (approved or not) take precedence over other state laws”
because “they are both contracts and binding reciprocal statutes among sovereign
states.” Taxpayers thus contend section 25128 violates the contract clauses of the
federal and state Constitutions because it impairs an obligation created by an
interstate compact. (See U.S. Const., art. I, § 10, cl. 1; Cal. Const., art. I, § 9.) We
need not decide whether an interstate compact not approved by Congress
necessarily takes precedence over other state law. Instead, we evaluate whether
this Compact is a binding contract among its members. We conclude it is not.

B. The Compact is Not a Binding Reciprocal Agreement
The Commission, which was created by the Compact, has filed an amicus
curiae brief here. In the Commission‟s own view, the Compact is not binding.
“Rather, it is an advisory compact that contains two apportionment provisions, the
UDITPA formula and the election provision . . . which are more in the nature of
model uniform laws.” To support this interpretation, the Commission urges a test
derived from Northeast Bancorp v. Board of Governors, FRS (1985) 472 U.S. 159
(Northeast Bancorp). That case involved an attempt by several out-of-state banks
to acquire banks in New England. Federal law prohibited the acquisition of local
banks by out-of-state banks unless expressly authorized by state law. (See 12

9
U.S.C., former § 1842(d).) Some states passed laws permitting such acquisitions,
but only if the home-state law contained a reciprocity provision allowing
acquisitions by banks from the foreign state in question. Other states also allowed
acquisitions only by banks from a particular geographic area. (Northeast Bancorp,
at pp. 163-165.) The out-of-state banks claimed these state laws violated the
compact clause because they failed to garner congressional approval. Northeast
Bancorp expressed “doubt as to whether there is an agreement amounting to a
compact.” (Id. at p. 175.) The court reasoned “several of the classic indicia of a
compact are missing. No joint organization or body has been established to
regulate regional banking or for any other purpose. Neither statute is conditioned
on action by the other State, and each State is free to modify or repeal its law
unilaterally. Most importantly, neither statute requires a reciprocation of the
regional limitation.” (Ibid.) The Commission asserts the Compact does not satisfy
any of the indicia of binding interstate compacts noted in Northeast Bancorp. We
agree.7

1. Reciprocal Obligations
We begin with the “[m]ost important[]” factor: whether the Compact
created reciprocal obligations among member states. (Northeast Bancorp, supra,
472 U.S. at p. 175.) The Commission argues the Compact creates no reciprocal

7 Taxpayers argue in passing that the U.S. Steel decision determined the
Compact was a binding one, and “[i]f the Court had a doubt about whether the
Compact was a binding interstate compact, it would have said so.” The argument
is unpersuasive. U.S. Steel concluded only that the compact clause did not require
Congress to approve the Compact for it to be valid. (See U.S. Steel, supra, 434
U.S. at pp. 472-478.) The court had no occasion to decide whether the Compact
constituted a binding agreement that could not be unilaterally amended by its
members. Indeed, U.S. Steel predated Northeast Bancorp, wherein the high court
first articulated the factors to consider in determining the binding nature of an
interstate agreement.

10
obligations, especially with respect to maintaining the election provision. Like
Northeast Bancorp, U.S. Steel emphasized the importance of reciprocity when
determining whether a binding interstate compact exists. “[T]he mere form of the
interstate agreement cannot be dispositive” of whether the compact clause applies.
(U.S. Steel, supra, 434 U.S. at p. 470.) It went on to explain “[a]greements
effected through reciprocal legislation may present opportunities for enhancement
of state power at the expense of the federal supremacy similar to the threats
inherent in a more formalized „compact.‟ ” (Ibid., fn. omitted.) Conversely, as
U.S. Steel suggested, simply because an agreement is labeled a “compact” is not
dispositive of whether it is binding unless it contains key features, such as
reciprocity. (See Northeast Bancorp, supra, 472 U.S. at p. 175.)
Taxpayers admit that “party states do not perform or deliver obligations to
one [another]” and “have no incentive to enforce the Compact,” which “is not the
type of contract where the parties exchange obligations and are in a meaningful
position to gauge each other‟s compliance.” Nevertheless, they argue the member
states‟ commitment to the UDITPA formula is what prevented congressional
intervention, and maintenance of that formula is mutual, reciprocal, and “critical to
the effectiveness of the Compact.”
As described ante, there is little doubt that, decades ago, the possibility of
congressional action helped spur adoption of the Compact. But Taxpayers do not
explain how a state‟s elimination of the UDITPA formula renders the Compact
less “effective.” More importantly, whether it does or not is a completely different
question from whether the Compact constitutes a reciprocal obligation among
members. The Compact‟s provision of election between the UDITPA or any other
state formula does not create an obligation of member states to each other. Even
if maintenance of the election provision in one member state might benefit
taxpayers in another state, that benefit to the taxpayer applies whether the taxpayer

11
is from a member or nonmember state. This application is more akin to the
adoption of a model law rather than the creation of any mutual obligations among
Compact members. We note the Commission, in its amicus curiae brief, does not
urge that California‟s decision to discontinue use of the UDITPA formula in any
way undermines the effectiveness of the Compact.
Indeed, as noted, the UDITPA was promulgated as a model law, and our
Legislature adopted it years before joining the Compact. Clearly, the Legislature
is free to amend its own legislation even if it is based on a model law. (See
Microsoft Corp. v. Franchise Tax Bd. (2006) 39 Cal.4th 750, 772 [noting the
Legislature was “free” to amend the UDITPA].) Nothing in the language of the
Compact, nor California‟s enactment of it, suggested any change in the
Legislature‟s authority to modify the apportionment formula. The Legislative
Counsel commented that the Compact did not “alter any state tax.” (Ops. Cal.
Legis. Counsel, No. 11600 (May 27, 1973) Multistate Tax Compact (Assem. Bill
No. 1304) (1973-1974 Reg. Sess.) 5 Sen. J. (1973-1974 Reg. Sess.) p. 8250.)

2. Conditional or Unilateral Action
Other indicia of a binding compact include whether its effectiveness
depends on the conduct of other members and whether any provision prohibits
unilateral member action. With respect to the former, the Compact has not
required efficacious member action since 1967. By its terms, the Compact became
effective once it had been “enacted into law by any seven States.” (Compact, art.
X, § 1.) Nine states other than California enacted the Compact within six months
of its initial draft. (Com., First Annual Rep., supra, at p. 2.) Thereafter, the
Compact was effective “as to any other State upon its enactment thereof.”
(Compact, art. X, § 1.) Thus, the Compact had long been effective when

12
California joined it in 1974. No action by existing members was required to admit
California.
Any state may join the Compact simply by enacting its provisions into law.
As U.S. Steel observed, “each State is free to withdraw at any time.” (U.S. Steel,
supra, 434 U.S. at p. 473; see Compact, art. X, § 2.) Thus, any state may join or
leave the Compact without notice. This ability of member states to unilaterally
come and go as they please militates against a finding that the Compact is a
binding interstate agreement under Northeast Bancorp. (See Seattle Master
Builders v. Pacific Northwest Elec. Power (9th Cir. 1986) 786 F.2d 1359, 1372
(Seattle Master Builders).)
Contrary to the Taxpayers‟ arguments, the presence of a withdrawal
provision says nothing about a member state‟s ability to unilaterally modify the
Compact. Indeed, no express language of the Compact or any California enabling
statute proscribes unilateral amendment of our own state law. As the FTB
observes, the history of the Compact is replete with examples of unilateral state
action. Florida was one of the first states to enact the Compact in 1967. Yet it
later passed statutes eliminating Compact articles III and IV from Florida law.
The Commission subsequently resolved that, in spite of that action, Florida was
recognized “as a regular member in good standing of the Multistate Tax Compact
and the Multistate Tax Commission.” (Com., Minutes of Meeting, Dec. 1, 1972,
p. 2.) Numerous member states have subsequently enacted different
apportionment formulae. Currently, only seven of the Compact‟s 16 members
employ the equal-weighted UDITPA formula.8

8 Those states are Alaska, Hawaii, Kansas, Missouri, Montana, New Mexico,
and North Dakota. (See Federation of Tax Administrators, chart, State
Apportionment of Corporate Income, available online at
(footnote continued on next page)

13
 Member state adoption of different formulae, coupled with the Compact‟s
express grant of authority to join or leave the Compact at will, confirms that the
Compact did not prohibit unilateral state action. The freedom of members to
engage in such unilateral conduct is inconsistent with the type of binding
agreement contemplated by Northeast Bancorp.

3. Regulatory Organization
The Taxpayers argue that the establishment of the Commission is “a classic
characteristic of an interstate compact.” The argument ignores an important point.
Although the Compact established the Commission, that body has no authority
ordinarily associated with a regulatory organization. Article VI of the Compact
authorizes the Commission to “[s]tudy State and local tax systems and particularly
types of State and local taxes,” “[d]evelop and recommend proposals for an
increase in uniformity or compatibility of State and local tax laws with a view
toward encouraging the simplification and improvement of State and local tax law
and administration,” and “[c]ompile and publish such information as would, in its
judgment, assist the party States in implementation of the compact and taxpayers
in complying with State and local tax laws.” (Compact, art. VI, § 3, subds. (a)-(c),
italics added.) As the Commission observes, these powers “are strictly limited to
an advisory and informational role.”
The Commission may also promulgate administrative regulations “in the
event that two or more States have uniform provisions relating to specified types
of taxes.” (U.S. Steel, supra, 434 U.S. at p. 457; see Compact, art. VII.) However,

(footnote continued from previous page)

[as of Dec. 31,
2015].)

14
as U.S. Steel observed: “These regulations are advisory only. Each member State
has the power to reject, disregard, amend, or modify any rules or regulations
promulgated by the Commission. They have no force in any member State until
adopted by that State in accordance with its own law.” (U.S. Steel, at p. 457.)
While these regulations may play a persuasive role in shaping policy, the
Commission‟s inability to bind member states to adopt them further confirms it is
not a regulatory organization within the meaning of Northeast Bancorp.
Similarly, the Commission may conduct taxpayer audits but only if the
member state has passed separate authorizing legislation and expressly requests
the audit. (Compact, art. VIII.) In such a case, the Commission acts as “the
State‟s auditing agent” and any power of compulsory process derives from the
authority vested by the laws of the requesting member state. (U.S. Steel, supra,
434 U.S. at p. 457; Compact, art. VIII, § 4.) Further, although the Commission
may “require the attendance of persons and the production of documents in
connection with its audits,” it “has no power to punish failures to comply” and
“must resort to the courts for compulsory process, as would any auditing agent
employed by the individual States.” (U.S. Steel, at p. 475; Compact, art. VIII,
§§ 3-4.)
Finally, the Compact authorizes the Commission to provide for binding
arbitration of disputes between member states. (Compact, art. IX, § 1.) However,
the Commission has never adopted such a regulation and no arbitration provisions
are currently effective. (See U.S. Steel, supra, 434 U.S. at p. 457, fn. 6.) Indeed,
California hesitated to join the Compact due, in part, to concerns that such an
arbitration provision would not only displace California institutions as the forum
for tax disputes, but that “easy access to arbitration” would lead to “erosion of the
state‟s tax base.” (Assem. Com. on Rev. & Tax., analysis of Assem. Bill No. 1304
(1973-1974 Reg. Sess.) as amended June 14, 1973, p. 3.) The Legislature

15
approved California‟s membership upon explicit condition that the Commission
not make the arbitration provision effective. An uncodified portion of our
enacting statute provided that California would automatically withdraw from the
Compact if the Commission changed its voting rules or if the arbitration provision
was made effective. (Stats. 1974, ch. 93, § 5, p. 208.)9
As discussed, U.S. Steel held the Compact did not encroach on federal
authority in any way that would require congressional approval under the compact
clause. The U.S. Steel court observed there is no “delegation of sovereign power
to the Commission; each State retains complete freedom to adopt or reject the
rules and regulations of the Commission.” (U.S. Steel, supra, 434 U.S. at p. 473.)
The Commission simply has no binding regulatory authority upon member states.
Whatever power the Commission has to promulgate regulations or conduct audits
exists solely at the pleasure of each member state. Further, the only express
powers of the Commission independent of authority granted by each member is

9 Section 5 of the enacting statute provided: “This act is hereby repealed and
shall have no further force or effect, and this state is withdrawn from the
Multistate Tax Compact as set forth in Section 38006 of the Revenue and Taxation
Code, on the 10th day after the occurrence of any of the following events after the
operative date of this act: [¶] (1) The Multistate Tax Commission adopts any
regulation placing in effect Article IX of the Multistate Tax Compact, or any part
thereof, as set forth in Section 38006 of the Revenue and Taxation Code, or [¶] (2)
The Multistate Tax Commission places in effect any bylaw or regulation or
parliamentary ruling for the conduct of its business which permits any matter
voted upon to be adopted other than by receiving a majority of the number of
member states and a majority of the total population of all the member states
according to the current United States Statistical Abstract, or [¶] (3) The entry of a
final judgment by any court of competent jurisdiction requiring the Multistate Tax
Commission to place in effect Article IX of the Multistate Tax Compact as set
forth in Section 38006 of the Revenue and Taxation Code, or requiring or
approving any matter to be adopted by the Multistate Tax Commission by the
employment of a different manner of voting than that set forth in subparagraph (2)
of this section.” (Stats. 1974, ch. 93, § 5, p. 208.)

16
purely advisory. It may study tax laws, make proposals, and publish data.
(Compact, art. VI, § 3.) Because the Commission lacks any binding authority over
the member states, it is not a joint regulatory organization as contemplated by
Northeast Bancorp. (Northeast Bancorp, supra, 472 U.S. at p. 175.)10
Nothing in the language of former section 38006, the circumstances of its
enactment, the subsequent conduct of other members states, or the position taken
by the Commission, indicate our Legislature intended to be bound by the taxpayer
election provision.

C. The Reenactment Rule Does Not Bar the Legislature’s Amendment
of Section 25128
Taxpayers alternatively argue that the Legislature‟s amendment of section
25128 is invalid because it violates the reenactment rule. That rule derives from
article IV, section 9 of our Constitution, stating: “A statute shall embrace but one
subject, which shall be expressed in its title. If a statute embraces a subject not
expressed in its title, only the part not expressed is void. A statute may not be
amended by reference to its title. A section of a statute may not be amended
unless the section is re-enacted as amended.” (Italics added.) One purpose of this
provision “is to „make sure legislators are not operating in the blind when they
amend legislation, and to make sure the public can become apprised of changes in
the law.‟ ” (St. John’s Well Child and Family Center v. Schwarzenegger (2010)

10 See also In re Manuel P. (1989) 215 Cal.App.3d 48, 66-67 (statute
regarding the deportation of minor wards did not create an interstate agreement
within the meaning of Northeast Bancorp); compare with Seattle Master Builders,
supra, 786 F.2d at p. 1363 (concluding the Pacific Northwest Electric Power and
Conservation Planning Council constituted a compact agency within the meaning
of Northeast Bancorp).

17
50 Cal.4th 960, 983, fn. 20; Hellman v. Shoulters (1896) 114 Cal. 136, 152
(Hellman).)
Generally, the reenactment rule does not apply to statutes that act to
“amend” others only by implication. (Hellman, supra, 114 Cal. at p. 152.) We
reasoned long ago in Hellman: “To say that every statute which thus affects the
operation of another is therefore an amendment of it, would introduce into the law
an element of uncertainty which no one can estimate. It is impossible for the
wisest legislator to know in advance how every statute proposed would affect the
operation of existing laws.” (Ibid.) The Legislature‟s 1993 amendment of section
25128 replaced the equal-weighted UDITPA apportionment formula with a
different formula double-counting the sales factor. This amendment expressly
referenced the Compact, stating that it applied “[n]otwithstanding Section
38006 . . . .” (§ 25128(a) as amended by Stats. 1993, ch. 946, § 1, p. 5441.)
Although Taxpayers note that the legislative bill analyses of the amendment did
not refer to the Compact or the election provision expressly, reference to the
Compact in section 25128(a) itself is strong evidence that the Legislature acted
with the Compact in mind. “Even without a re-enactment, the legislators and the
public have been reasonably notified of the changes in the law.” (White v. State of
California (2001) 88 Cal.App.4th 298, 315; see Brosnahan v. Brown (1982) 32
Cal.3d 236, 256-257.) So too here. Even without a reenactment of section 38006
to eliminate the election language, the amendment of section 25128 did not violate
the reenactment rule.

D. The Legislature Intended to Supersede the Compact’s Election
Provision
Having concluded the Legislature had the unilateral authority to eliminate
the Compact‟s election provision, we must determine whether it intended to do so.

18
Taxpayers suggest it did not, arguing that the Legislature intended section 25128‟s
double-sales factor formula to apply only “if the Compact Formula is not elected.”
Both the language of section 25128 and its legislative history defeat such a
claim. First, section 25128(a) explicitly provides that “all business income shall
be apportioned to this state by” using the formula it sets out, “[n]otwithstanding
Section 38006 [i.e., the Compact] . . . .” (Italics added.) There is no ambiguity in
this language. The Assembly Committee on Revenue and Taxation‟s analysis of
the bill explained the need for the amendment: “California and most other states
have used an equal weighted three-factor apportionment formula for many years.
This formula has been retained largely out of a belief that uniformity among states
is the best way to ensure that corporations are not subject to double taxation or that
some income „falls through the crack‟. While any apportionment formula may be
somewhat arbitrary, supporters of the current system argue that it is still in
California‟s best interest to remain uniform with other states. [¶] However, while
uniformity in apportionment methods existed between states in the 1960‟s and
may still be a desirable principle, this uniformity has been eroded significantly in
recent years by the actions of other states. Currently twenty-five other states at
least provide an option to certain taxpayers to place an additional weight on the
sales factor in their apportionment formulas . . . . [¶] Proponents believe that
California‟s continued reliance upon the three-factor apportionment system results
in discriminatory taxation against California-based companies, particularly given
the additional weight given to sales factors by other states.” (Assem. Com. on
Rev. & Tax., analysis of Sen. Bill No. 1176 (1993-1994 Reg. Sess.) as introduced
Mar. 5, 1993, pp. 2-3; see also Sen. Com. on Rev. & Tax., analysis of Sen. Bill
No. 1176 (1993-1994 Reg. Sess.) as introduced Mar. 5, 1993, p. 2.) In light of the
statute‟s language and this legislative history, there is no credible argument that
the Legislature intended to retain the Compact‟s election provision.

19
 III. DISPOSITION
The Court of Appeal‟s judgment is reversed.

CORRIGAN, J.
WE CONCUR:

CANTIL-SAKAUYE, C. J.
WERDEGAR, J.
LIU, J.
CUÉLLAR, J.
KRUGER, J.
MURRAY, J. *

_______________________________________________________

* Associate Justice of the Court of Appeal, Third Appellate District, assigned
by the Chief Justice pursuant to article VI, section 6 of the California Constitution.

20
See last page for addresses and telephone numbers for counsel who argued in Supreme Court.

Name of Opinion The Gillette Company v. Franchise Tax Board
__________________________________________________________________________________

Unpublished Opinion
Original Appeal
Original Proceeding
Review Granted XXX 209 Cal.App.4th 938
Rehearing Granted

__________________________________________________________________________________

Opinion No. S206587
Date Filed: December 31, 2015

__________________________________________________________________________________

Court: Superior
County: San Francisco
Judge: Richard A. Kramer

__________________________________________________________________________________

Counsel:

Silverstein & Pomerantz, Amy L. Silverstein, Edwin P. Antolin, Johanna W. Roberts, Charles E. Olson and
Lindsay T. Braunig for Plaintiffs and Appellants.

Jeffrey B. Litwak; BraunHagey & Borden and Matthew Borden as Amici Curiae on behalf of Plaintiffs and
Appellants.

Wm. Gregory Turner for Council on State Taxation as Amicus Curiae on behalf of Plaintiffs and
Appellants.

Keith G. Landry; Reed Smith, Brian W. Toman, Mardiros H. Dakessian, Muhammad I. Shaikh and Erin J.
Mariano for Institute for Professionals in Taxation as Amicus Curiae on behalf of Plaintiffs and Appellants.

Law Offices of Miriam Hiser, Miriam Hiser; Masters, Mullins & Arrington and Richard L. Masters for
Interstate Commission for Juveniles and Association of Compact Administrators of the Interstate Compact
on the Placement of Children as Amici Curiae on behalf of Plaintiffs and Appellants.

Kamala D. Harris, Attorney General, Susan Duncan Lee, Acting State Solicitor General, Edward C.
DuMont, State Solicitor General, Kathleen A. Kenealy, Chief Assistant Attorney General, Paul D. Gifford,
Assistant Attorney General, W. Dean Freeman, Joyce E. Hee and Lucy F. Wang, Deputy Attorneys
General, for Defendant and Respondent.
Page 2 – S206587 – counsel continued

Counsel:

Gregg Abbot, Attorney General (Texas), Mark L. Walters and Daniel T. Hodge, Assistant Attorneys
General, Jonathan F. Mitchell, Solicitor General, Rance Craft, Assistant Solicitor General; Luther Strange,
Attorney General (Alabama); Michael C. Geraghty, Attorney General (Alaska); Dustin McDaniel, Attorney
General (Arkansas); John W. Suthers, Attorney General (Colorado); Irvin B. Nathan, Attorney General
(District of Columbia); David M. Louie, Attorney General (Hawaii); Lawrence G. Wasden, Attorney
General (Idaho); Derek Schmidt, Attorney General (Kansas); Bill Schuette, Attorney General (Michigan);
Lori Swanson, Attorney General (Minnesota); Chris Koster, Attorney General (Missouri), Timothy C. Fox,
Attorney General (Montana); Catherine Cortez Masto, Attorney General (Nevada); Gary K. King, Attorney
General (New Mexico); Wayne Stenehjem, Attorney General (North Dakota); Ellen F. Rosenblum,
Attorney General (Oregon); John E. Swallow, Attorney General (Utah); and Robert W. Ferguson, Attorney
General (Washington) as Amici Curiae on behalf of the states of Texas, Alabama, Alaska, Arkansas,
Colorado, Hawaii, Idaho, Kansas, Michigan, Minnesota, Missouri, Montana, Nevada, New Mexico, North
Dakota, Oregon, Utah, Washington and the District of Columbia.

Joe Huddleston, Shirley K. Sicilian and Sheldon H. Laskin for Multistate Tax Commission as Amicus
Curiae on behalf of Defendant and Respondent.
Counsel who argued in Supreme Court (not intended for publication with opinion):

Amy L. Silverstein
Silverstein & Pomerantz
12 Gough Street, 2nd Floor
San Francisco, CA 94103
(415) 593-3500

Edward C. DuMont
State Solicitor General
455 Golden Gate Avenue, Suite 11000
San Francisco, CA 94102-7004
(415) 703-5202